Big changes to roll out at Panera

ST. LOUIS — The problem facing Panera Bread Co. may be described by a classic Yogi Berra quote: “Nobody goes there anymore. It’s too crowded.”

The bakery-cafe chain said its customers visit less frequently because of slower service related to long lines and greater demand for Panera’s products. As a result, comparable sales growth slid to 1.7% during the third quarter and 1.6% during the first 27 days of the fourth quarter.

“Based on our detailed self-examination and our research, we have concluded that our success at growing sales rapidly over the past few years has outstripped some of our capabilities in some of our cafes,” Ron Shaich, chairman and chief executive officer, said during an Oct. 23 earnings call with analysts. “Walk into any of our cafes at 12:30 p.m. during the lunch rush, and you will see the lines. It is clear that the demand for our product is not the issue.”

The issue, he said, is meeting the demand.

“We have been hard at work for the better part of the last two years on a series of demand drivers that we believe have the potential to significantly improve our guest experience and grow our transactions,” Mr. Shaich said. “But here is the conundrum we face: If capabilities are not in place today to handle the business we are presently doing, how can we expect to benefit from the additional demand fueled by our initiatives?”

To reverse the downward comparable sales trajectory, Panera is deploying significant transaction-driving initiatives. Such efforts include refocusing on key operating metrics, such as speed of service and accuracy; adding approximately 35 hours of labor per week into each cafe, which will add $15 million in incremental annual labor expenses; installing additional production equipment in capacity-constrained cafes; and introducing new kitchen displays systems to facilitate communication and improve accuracy.

Additionally, Panera plans to trim its menu “modestly” and reduce the number of phone-in orders, which disrupt service.

“It is amazing to me, but presently 10% of our customers call in, and we have to drop everything,” Mr. Shaich said. “We have to actually leave the counter to take that call. And then they waltz in, and they come up to the counter, and expect us to come over to them and bring the food to them at that moment. We know the phone-in business is best served and will cause significantly less disruption, and cost significantly less to serve when those orders are moved to the web.”

Changes to Panera’s catering, which represents about 8% of sales, also are under way. Panera is testing catering hubs with dedicated management, staff and drivers who will work to support the catering volumes of two to five cafes.

“Such hubs have proven that they can free the manager to focus on growing retail sales, which when we set up these catering hubs is actually what happens, the retail sales go up,” Mr. Shaich said. “And with the dedicated catering facility, it also leads to our ability to grow those catering sales more intensely, and with far greater focus. Though catering hubs will take years to roll out across the full system, expect us to create scores of these catering hubs in 2014.”

While Panera is implementing a number of initiatives to improve its sales picture, price reduction is not a step the company said it plans to take.

“Right now, many in the restaurant industry have chosen to dramatically discount, and in many cases, reduce the quality of their food to offer those discounts,” Mr. Shaich said. “We simply don’t see this as a viable approach long term. Our target audience will remain those customers who value the elevated experience and the quality of ingredients that we offer. We continue to believe, and every study we perform confirms this, that if we can deliver on the full experience of food and service, the full Panera experience, our customers are more than satisfied with the value they receive for the money they spend.”

A new menu structure scheduled for next year will group items by price point and allow customers to choose menu items as a half portion, whole portion or part of a pick-two combination.

“While our testing shows no indication of any change in gross profit as a result of this new menu structure, we do expect that customers will perceive significantly more lower-priced lighter options available to them at Panera,” Mr. Shaich said.

Also planned for next year is the launch of a flatbread platform, featuring artisan Indian tandoori-style flatbreads with “great proteins and interesting flavors” that are designed to be eaten individually or in pairings.

“They will offer the customer the option to choose their portion size and ultimately their check size,” Mr. Shaich said. “Importantly, though, this product will open up a whole new platform for Panera as we think about snacking, and how our customers may want to eat across day parts into the future.”

Other new menu items slated for a post-Thanksgiving launch are a country-style mushroom soup with truffle oil, a signature Fontina grilled cheese sandwich and chicken tortellini alfredo, plus other new pastas. Panera’s pasta platform, introduced this year, has helped drive the chain’s dinner business, and other differentiated dishes, such as products with shrimp, represent “an offering that many other brands in the restaurant space would struggle to replicate,” Mr. Shaich said. Still, he added, competition has been “extraordinarily red-hot.”

“You have got fast-food trying to be Panera,” he said. “You have got casual dining — everybody and their brother doing some version of you-pick-two at a price point. You have got the independents and the regional guys. … It isn’t that we are sitting here being the victim of competition. It is that the very nature of running a business is continuing to drive competitive advantage and competitive position. And we believe that at the core, driving competitive position and competitive advantage is for us, very much rooted in how we execute. …

“And I think that we need to step back just a little bit, and make certain that we are investing properly in the stores, and intensify our structure — our effort on being that better competitive alternative, much of it rooted in execution. But also, we are rooted in taking advantage of scale through our ability to build connections with guests, and ultimately through our vision for a new guest experience, a newly enabled guest experience that is much less friction for the guest.”

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